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Reference-Dependent Preferences and the Impact of Wage Increases on Job Satisfaction: Theory and Evidence

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  • Christian Grund
  • Dirk Sliwka

Abstract

We study the impact of wage increases on job satisfaction theoretically and empirically. To do this, we apply a utility function that rises with the absolute wage level as well as with wage increases. We show that when employees can influence their wages by exerting effort, myopic utility maximization directly implies increasing and concave wage profiles. Furthermore, employees become unhappier over time if they remain in the same job, even though wages increase. Using data from 19 waves of the German Socio-Economic Panel, we find empirical support for both the form of the utility function and the decreasing job satisfaction patterns.

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  • Christian Grund & Dirk Sliwka, 2007. "Reference-Dependent Preferences and the Impact of Wage Increases on Job Satisfaction: Theory and Evidence," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(2), pages 313-335, June.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200706)163:2_313:rpatio_2.0.tx_2-2
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    More about this item

    JEL classification:

    • M54 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Management
    • J28 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Safety; Job Satisfaction; Related Public Policy
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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